Facing financial difficulties as a business is challenging. When you have outstanding bills, debts and wages to pay, and the cash flow just isn’t there to meet your obligations, it can quickly feel like everything is falling in around you.
It doesn’t help that the ‘official’ procedures for dealing with financial stress in businesses can often feel as daunting and confusing as everything else. Terms like insolvency, receivership and liquidation carry a weight of impending doom with them. Not unreasonably, in some cases.
The role of our Corporate Recovery team at Xeinadin is to help businesses that are facing the threat of insolvency, and if possible turn their fortunes around. For us, that starts with demystifying the processes, laying out the realistic options in simple terms, and handing back business owners and directors a sense of control.
With that in mind, in this series of posts, we’re going to explore the options available when you are facing insolvency, starting with a rundown of insolvency procedures.
Insolvency procedures
Insolvency itself simply means not having enough money to pay what you owe. The principle of having formal procedures for handling insolvency arises from the wider economic need to curtail and mitigate this happening. A completely unregulated market where businesses stopped paying creditors as soon as they were in distress would quickly lead to financial difficulties spreading like a contagion, causing widespread chaos and financial volatility.
In Ireland, not counting liquidation (which we’ll look at in another blog), there are four mechanisms for dealing with company insolvency.
Examinership
As or just before a company becomes insolvent, the courts can appoint an official known as an Examiner to take charge of the company’s affairs. This can be initiated by the company, its directors or by creditors, but is dependent on material evidence that the business cannot pay its dues.
Once an Examiner has been appointed, no further action can be taken against the company with regards to recovering debts, including creditors seeking court orders and winding-up petitions etc. The Examiner has a maximum of 100 days to make proposals for rescuing the business, or otherwise proceeding to liquidation.
Receivership
Like Examinership, Receivership involves an official being appointed by a Court. A key difference is that a Receiver is appointed in the context of either secured debt or debenture when the terms of the loan agreement have been breached. A Receiver’s role is to take control of the debtor’s assets with a view to paying what is owed to the creditor(s). Most of the time, a Receivership comes about when the debtor faces insolvency, but this doesn’t have to be the case if loan terms are breached in other circumstances.
Scheme of Arrangement
A Scheme of Arrangement is arguably the least ‘formal’ of the insolvency procedures. It’s a voluntary process entered into between the members/directors of a company and its creditors, with the aim of restructuring debts by agreement to make them manageable.
While there don’t have to be any applications to the courts to kick off a scheme of arrangement, there are rules on how discussions and arrangements proceed. The final agreement must be signed off in court and is legally binding.
Small Company Administrative Rescue Process (SCARP)
This additional insolvency procedure is available to SMEs with a company turnover under €12m, and/or a balance sheet under €6m, or with 50 or fewer employees. SCARPs work in a similar way to an Examinership, but with a slimmed-down role for the courts to keep legal costs down. Instead of an Examiner, a Process Advisor is appointed. While this official does not formally take charge of the company’s affairs, they are charged with evaluating the business’s viability and coming up with a rescue plan which must then be approved by creditors. The key stipulation for any rescue plan is that it must prioritise the interests of creditors.
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